Court quashes show-cause notice stating resident payers should not be exposed to onerous responsibility of maintaining books and documents for an uncertain period of time

Delhi High Court: While determining the issues whether Section 201 of the Income Tax Act, 1961 (hereinafter the IT Act) would also apply to payments made to “non-residents” and whether the impugned show-cause notices are barred by limitation, the Bench of S. Ravindra Bhat and Deepa Sharma, JJ. quashed the notices stating that administrative convenience, cannot outweigh the harsh nature of the consequence, which would expose resident payers to the onerous responsibility of maintaining books and documents for an uncertain period of time.

In the instant writ petition the petitioner, a telecommunications service provider was issued several show-cause notices dated 31.03.2011, for the period F.Y. 2001-2002 to 2010-2011 and 05.03.2012 issued for FYs 2001-2002 to 2006-2007, in order to deem the petitioner as an “assessee in default” on account of failure to deduct tax at source on payments of interconnect usage charges to non-resident operators. The petitioners argued that Section 201 did not expressly mention “non-residents”, and only prescribed a time limitation for deeming one to be an assessee-in-default for residents. The petitioner relied on Commissioner of Income Tax v. NHK-Japan Broadcasting Ltd., 2008 SCC OnLine Del 1433 : (2008) 305 ITR 137  and the ruling that followed it, i.e. Commissioner of Income Tax v. Hutchison Essar Telecom Ltd., 2010 SCC OnLine Del 1505: [2010] 323 ITR 230 (Del) to submit that proceedings under Section 201 cannot be initiated beyond the period of four years.

The Revenue Department on the other hand characterised this position as untenable since the two cases did not make a distinction between payments made to residents and non-residents. The memorandum explaining the provisions of Finance (2) Bill, 2009, which was in the form of a circular issued by the Central Board of Direct Taxes (CBDT) proposed to provide for express time-limits in the Act within which specified order under Section 201(1) will be passed. However, no time-limits have been prescribed for order under sub-section(1) of Section 201 where the deductee is a non-resident as it may not be administratively possible to recover the tax from the non- residents.

The Court said “It is quite possible to argue that the demarcation and distinction between payments made to residents and non-residents through the amendment, can mean that where no period of limitation for Sections 200 and 201 has been prescribed, one cannot be read into the Act.”

The Court, in Vodafone Essar Mobile Services Ltd. v. Union of India, 2016 (385) ITR 436 (Del) , was conscious of the absence of any limitation period in respect of payments to non-residents, for the purpose of Section 195 read with Section 201. Yet, it was held that the provision of “reasonable time” be read into the act for initiating action, as no reasonable time has been expressly provided in the Income Tax Act, 1961, which make the notices invalid under the statute. The rejection of this rationale for not providing limitation: “as it may not be administratively possible to recover the tax from the non-resident” in GE India Technology Centre v. CIT, 2010 (10) SCC 29,  was affirmed by this Court. [Bharti Airtel Ltd. v. Union of India, 2016 SCC OnLine Del 6338, decided on 19.12.2016]

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